It’s become an unfortunate staple of the times that tech companies regularly get reporters to act as stenographers, even when the companies have too obviously fuzzy ideas about mature industries with high barriers to entry like banking. In the same vein, when the tech company with a hairball scheme is a big name like Amazon or Apple, readers who ought to know better seem to turn off their critical thinking apparatus entirely.

That means that rather than yours truly doing a high level shellacking, I have to call in the heavy artillery, in the form of our payments system expert Clive, to go scorched earth. Even then, it seems to take an undue amount of repetition to get across the idea that just because the protagonist has a lot of dough and clever developers does not mean that it can get where it thinks it wants to go without spending vastly more time and money that it would ever be worth.

Today’s object lesson is a breathless and suitably vague story in the Wall Street Journal, Next Up for Amazon: Checking Accounts, about Amazon wanting to get into the banking biz. Rest assured, even the headline is wrong unless you accept an awfully liberal definition what Amazon getting into checking accounts would amount to.

Amazon’s need to talk up and make gestures about conquering new markets is a reminder of how much investors want to see more growth from the Seattle giant. The law of large numbers alone says it is going to run out of runway.

Amazon.com Inc. is in talks with big banks including JPMorgan Chase & Co. about building a checking-account-like product the online retailer could offer its customers….

The effort is still in its early stages and may not come to fruition…

After several paragraphs about what a gee whiz company Amazon is, we get to this:

In banking, however, Amazon appears to be arriving more as a partner than a disrupter.

Last fall, it put out a request for proposals from several banks for a hybrid-type checking account and is weighing pitches from firms including JPMorgan and Capital One Financial Corp. , some of the people said. It is too early to say exactly what the product will look like, including whether it would give customers the ability to write checks, directly pay bills, or access to a nationwide ATM network.

So there’s no product concept here, just a nebulous belief on Amazon’s behalf that because it gets an absolutely ginormous volume of customer orders and has the interface to payments processors, surely it can leverage that somehow into taking a bigger chunk out of banks. Mind you, it does so to a degree already by offering what is called a co-branded credit card, which runs over a bank’s payment platform (in this case, Chase’s). These have been around for over two decades. Amazon’s arrangement with Chase supposedly has some novel features, which likely means Amazon was able to extract a better economic deal and probably some more services (like enhanced reporting) than the normal co-branded card deal because Amazon.

Now let us turn the microphone over to our Clive:

Ridiculous. Ridiculous. Ridiculous.

Highlighting the sheer implausibly of any concept that Amazon could offer a useable product merely through its own platform, the Journal suggests that an Amazon Pay based proposition would be a “proposal to start offering a product similar to checking account”. Which is an attempt to finesse a retail money management product must-do — the ability to issue checks and be route-able via an ACH (Automated Clearing House) routing number.

This mish-mashing of two entirely different product designs (credit card accounts and checking accounts) illustrates the dreamland which the supposed Amazon game changer is occupying.

Now, it isn’t unheard of to have a credit card product linked to a checking account (the credit card’s line of credit is aligned to the checking account and if you write, say, a check where there’s no funds in the checking account to cover it, you automatically drawn down on your credit card limit). But these are merely gimmicks and marketing novelties. They don’t give ACH routing to the credit card account directly.

As soon as Amazon wants to offer ACH eligibility in its own right on its own product — and/or act as a deposit taker— it inevitably becomes a FDIC-registered bank. With all of the constraints that entails.

Again, there’s nothing in Amazon itself and nothing in Amazon Pay as a product that allows it a competitive advantage when trying to be a bank. This, presumably, is why it is proposing to be allied with JPM — it can’t in anything other than the longest of the long-term do what JPM does especially better or cheaper.

Amazon has to utilise the existing components of the banking system to a degree. Replicating them or procuring them (money transmission infrastructure and system access nodes, a core banking system, the card schemes, banking licences, a back office operation) is unavoidable. And some things like the card schemes and the banking licensing are not going to offer you any special functionality or flexibility just because you’re Amazon. They can’t vary their terms, the same terms have to apply to all — because they are systems themselves or they have to have conformation across all participants.

And the idea that Amazon could in short order could even begin to provide the same scale and sophistication that the card schemes provide is ludicrous. Mastercard’s near-1000 page Scheme Rules, for example, did not write itself overnight. It is the product of 40+ years of experience, local market compliance provisions and the school of hard knocks as it has had to fix its system in response to real events which have impacted the network.

And Amazon thinks it can come up with its own scheme overnight? With no subject matter expertise? And it presumably wants to operate in all major markets (North America, Central and South America, Asia Pacific and EMEA) — so to replicate what the existing schemes provide in terms of a homogeneous global service offer, it’ll need a globally co-ordinated launch.

But all it knows how to do in terms of a retail/consumer operation is a distribution operation. It seriously expects to be able to scale up as it will need to do?

Then we’ve got the merchant side. Even if Amazon is willing to subsidise merchant terminal equipment to support its alternate Amazon based method, it’ll need to be in the short to medium term backwards compatible with the existing card schemes. The merchants might expect to be quite happy with the updated EPoS hardware for either free or less than cost price — but it is not necessarily feasible for them to adopt new devices. Small merchant operations in mom and pop stores typically use stand-alone devices to payment acquiring but once you get to larger chains, their EPoS machines are integrated into their cash handling or teller hardware.

And for even bigger fish, it’s even more problematic — Walmart has a worldwide standard checkout hardware system with bespoke user/checkout interfaces and deep integration into its inventory and stock management system. Amazon really thinks that Walmart will allow it to insert itself into its proprietary systems?

Finally, any suggestion that somehow Amazon has some wonderful insight into customer ID is pure fantasy. Now, Amazon may be able to derive some very accurate estimations based on what information it can obtain from your Amazon ID or a Prime account and the Alexa devices you sign in on. I’m sure that Amazon could work out that my name, combined with my chosen payment card which is associated with my Amazon ID, belong to a person who spends most of their time at the GPS location where an Alexa is normally physically located at or where I get their orders delivered to. But that is in no way suitable for Financial Services Know Your Customer (KYC) requirements.

KYC is an obligation for the financial services company offering the services. It cannot outsource that to a 3rd party and then, if it is found to not be compliant, tell the regulatory bodies “oh, sorry about that, but it’s not our fault, it’s Amazon’s, please go and beat them up instead”.

One of the commonly accepted logical fallacies is where people assign higher credibility to a proponent of and idea just because they’re successful or have a lot of covetable assets (it goes something like that). It appears that because Amazon has billions in the bank, people just hear its name and, no matter how dumb the proposition, it’s simply accepted unquestionably.

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58 comments

Reminds me of the times when journos were waxing lyrical about Apple and Google eyeing the automotive manufacturing market, suggestions of course being that Daimler, BMW, GM should be quaking in their boots because the wonderkids are coming to eat their lunch. Ridiculous, ridiculous, ridiculous to borrow from Clive

It is said that Thomas Edison made 1,000 tries inventing the light bulb.

So, maybe one day, Amazon can really become everyone’s cradle-to-grave provider, here on Earth, or else, they have to tried to sell to Martians on Mars, and beyond the solar system, to sustain their growth and justify their stock valuation.

Indeed. At a recent company lunch my colleagues were all swapping health insurance horror stories, until someone mentioned the recent story about Amazon going into the health care business. The vocal members of the group all agreed “yeah, Bezos will fix it.” And they actually seemed to be serious.

My former boss, Daniel Godfrey, now an FT columnist and buy side consultant, thinks so and reckons the days of asset management ripping off investors are numbered as the likes of Google develop the software and content for more people to be able to manage their portfolio or facilitate greater competition and comparison of fees, performance etc.

I joined him in a venture called the People’s Investment Trust, but that fell at the last hurdle when not enough institutional money subscribed. We have not given up on the idea of more long-term and socially responsible investment.

Thanks for that Clive. Always a pleasure to see you go all Godzilla over a stupid idea. I have to admit chuckling through your whole take-down as each point was so blatantly obvious that it became funny to read. By the last paragraphs I was actually laughing out aloud.
I’ve read that Facebook has serious growth problems now that it is ‘mature’ and running out of new people to have sign up, especially young people (“Eww, that’s for oldies!”). Could there be a similar thing at work here with Amazon? That growth opportunities have slowed which will affect the way Wall Street views them which will affect their ratings? Their attempted expansion in Australia has proved a bit of a fiasco so far as a side note.

I last used Amazon about two years ago and it relentlessly spams me with Prime teaser offers. Over my cold, decaying and inanimate corpse would I ever sign up for Prime. So if I’m the bottom of a barrel, Amazon is scraping it. Priced as a growth stock, it’s in trouble if it lacks the, erm, growth. Issuing vapourware press releases is one of my canary in the coalmine signs for a company which is attempting to keep investors interests piqued to paper over, if nothing so much as bad news, then at least indifferent news in terms of how long it can continue to be a momentum play.

This one was particularly desperate.

flora’s comment below suggests they’re planting this story with every media tart that will carry it.

(and yes, when Yves pinged me over this story, I was spluttering with indignation that a — cough — respectable outlet would run it so uncritically; glad that came over in the piece!)

Amazon management has to come up with a plethora of fruitcake ideas, lest Bezos whips them like his warehouse workers.

As for the mass media, they are breathless Amazon pumpers. The other day they were talking about a new thing Amazon is printing on their box, calling it news and “Why Amazon is taking pictures of your front door?” So they had proof your package was delivered before the porch pirates steal it.

The problem is in getting enough people to buy the damn things, and the uniformity of access. At the moment you’d be looking at one for FedEx, one for UPS, one for USPS, etc, as they are all using different schema and unwilling to share access with competitors. Amazon could potentially leverage its scale to force co-operation in a unified solution. So could gummint local or otherwise.

Actually if the post office had been able to go thru with the cluster mailbox idea nationwide, the whole issue of boxes would be over. Cluster mailboxes come with a couple of parcel lockers and when you get a parcel that will fit, the key is put in your mailbox. (The key remains in the locker keyhole when you close the door, a special key is needed to release it). So for the USPS there is a solution that exists for it in newer areas of the country. Note that once upon a time back when some grocery deliver existed there were milk boxes that milk was put in and bread boxes etc.

Thanks for this post. The WSJ story was picked up and reported breathlessly by my nightly news show. My first thought was along the lines of: Amazon wants to setup a prepaid credit scheme for customers using banks. If enough suckers …er…customers sign up then Amazon creates a huge float for itself. What could go wrong? (And what does its current cash flow look like ?)

I agree Amazon may seriously underestimate the competency and resources required to get this up and running.

My guess is one motivation for these types of companies to get into banking is data. Since tech companies already hoover up customer biographical data, demographic data, browsing histories, and track your real-time GPS location, the next unexplored data frontier might be a comprehensive ledger of your financial transactions which they can only get from direct access to your checking and credit cards. I would’t sign on for that.

Exactly. I highly doubt their initial motive is anything more than having more data and control over spending and cash flow. They have their server farms to generate profit, the rest is about dominance. Seem to be the only major company with such a long term view but it’s apparently working for them. My guess is their business model is based on the frog in the boiling pot idea: garner enough dominance in the market and consumers, industries, governments, and finance will not know what is happening until it’s too late.

Granted, I’m not an expert, or even remotely knowledgeable on these topics, but their long game impresses (and scares the crap out of) me.

Have to disagree with the author(s) of the article here and most of the comments too. It can be done. People open Amazon Bank (subsidiary) checking accounts and deposit their monies. All customers’ USD monies in one big pot. Amazon then uses their own cryptocurrency to make transfers from one place to another. Setting their crypto value to one dollar and don’t permit it to trade. So when a person pays their mortgage payment their money doesn’t really go anywhere…Amazon sends crypto to balance the debit/credit equation. Once crypto balances the books, USD money is taken out of the big pot and the mortgage banker is paid. Amazon could make this work. The amount of crypto matches the amount of USD in the big pot.

Pure fantasy. Just because you wave a magic crypto currency wand over a problem doesn’t make it disappear. If you take US$ deposits, you have to either practice full reserve banking (i.e. don’t use the resultant balance sheet to lever up on) in which case you are disadvantaged compared to every other TBTF which makes a net interest margin on the spread it has between assets and liabilities or you play the the same game as the rest of the industry and try to make a living off of the difference between your various costs of capital, in which case you need to hold capital. If it tries to do the latter, why is Amazon Bank going to be any better at calculating credit risk and obtaining a lower wholesale funding costs than anyone else?

Your proposed Amazon Bank’s business model either stymies the Amazon Bank with an inferior income stream as it operates on a full reserve basis or it lumps it in with the rest of the industry where it lacks any discernible competitive advantage. Using a crypto currency as a conduit between the asset side of a balance sheet and the liability side of a balance sheet doesn’t change the fundamentals of the accounting, the risks or the potential returns.

Full marks for imagination, though. Have you considered a career in writing fiction?

Yeah, that, and don’t forget algorithms. Their infallibility to the rescue. Just like the 2007 vintage ones which said that never would all of the markets in the Case–Shiller Home Price Indices all decline simultaneously. Oh, oops again, wait a minute…

Why a checking account at all, why not go with prepaid cards that you can use bill pay to send money. (Similar to several that way). A prepaid card with built in bill pay means you can’t overdraw the account, since the bill pay will take the money when the bill pay entry is made. So no issue of processing bounced checks. This solution already exists. On some cards. If you stay away from paper checks, you avoid a whole bunch of issues.

If the idea is really that sure-fire stupid, shouldn’t “we” have been encouraging Amazon to do this very thing? And lose some money and reputation? Maybe enough to degrade and attrit its reach and power just a little bit?

Instead, “we” have just warned Doctor Evil Jeff not to do it, because it will be bad for Amazon.

Oh well . . . cat’s out of the bag now. But maybe Doctor Evil Jeff won’t read this article. And maybe his trembling minions will not dare to tell him. Maybe he can still be induced to put his hand into the monkey trap.

( Wouldn’t it be neat if some clever photo-shop masters could take some classic Doctor Evil images and artfully morph Doctor Evil’s face into the face of Jeff Bezos? While still leaving the shape of the head and skull undisturbed in its Doctor Evil form? And caption it Doctor Evil Jeff? If I were photo-shop worthy, I would try it myself).

Well . . . that’s why such a clever morph-meme picture would be so easy to do. More people recognize various figures and poses of Doctor Evil than recognize the literal Face of Bezos. But everyone who knows the Face of Bezos also knows the poses of Doctor Evil.

Just take the very most well known and iconic of these images and put the Face of Bezos into the Skull and Body of Doctor Evil. It would go far. I hope someone with photoshop knowledge will decide to do this for the fun of it.

Well, I watched that video most of the way with the sound on, and it seemed like a diversion from what I was thinking of. It isn’t showing Bezos as the Doctor Evil Jeff of our day. I still hope someone puts the face of Bezos on the head and body of Dr. Evil and calls it Dr. Evil Jeff.

As pointed out, Amazon has an Amazon Branded Credit Card, issued by, and processed by Chase.

I see a possibility of an Amazon Branded checking account, opened by and processed by, for example, Chase.

Amazon is a consumer marketing company, for products it retails, none of which are “made” by Amazon.

Amazon was not in the Food Retailing business, until it bought Whole Foods.

Could Amazon buy a Bank and become a Bank Holding Company, or buy a Bank Holding Company, as a subsidiary, and the parent company would not have to submit to all of its subsidiary licensing and regulation? Why would Amazon want to establish a new Bank, when it could buy an established Bank?

Winners are Marketing and distribution Companies, such as Amazon and Walmart.

I remain very uncomfortable watching the ongoing consolidations of Corporate power. Does Amazon’s banking hype make sense? Of course not. But does it have to make sense to portend a future threat in a world where existing laws are selectively enforced and new laws are created to satisfy Corporate schemes.

“Amazon has to utilise the existing components of the banking system to a degree. Replicating them or procuring them (money transmission infrastructure and system access nodes, a core banking system, the card schemes, banking licences, a back office operation) is unavoidable.” I think that goes without question. But I seriously doubt that Amazon has any desire to turn itself into a bank. I do believe Amazon might have crafted some scheme to further strengthen their control over their sellers and buyers. I also suspect they may have reached a scale where they could obtain special arrangements from a deal with a large bank.

“… any suggestion that somehow Amazon has some wonderful insight into customer ID is pure fantasy …” That may be but such big data fantasies feed money into Facebook and Google stocks.

“… people assign higher credibility to a proponent of an idea just because they’re successful or have a lot of covetable assets …” The people to worry about are the people who are dumping money into Amazon stock. Amazon’s hype feeds their imaginations and fills Amazon’s war chests. That is what is scary and lends plausibility to some new extension of Amazon’s monopoly constructs. In my opinion Amazon is about conquest and control today fed by the promise of profits tomorrow.

I must quibble your last assertion: “Winners are Marketing and distribution Companies, such as Amazon and Walmart.” I’m not sure that’s true. I’m not sure who the winners will be — just not us. General Electric tussled with Westinghouse and in stepped J.P. Morgan to deal with the problem. After what Neutron Jack started General Electric morphed into a finance company. I don’t know the music or the steps in the uncontrolled dance of elephants.

Why would Amazon buying a bank end up with it being a better bank than the bank it just bought it off? My TBTF drowns in data. Way more and way deeper in terms of customer behaviour than Amazon gets to have. It hires the best (groan…) software and consulting shops to help it make use of it all. It is still, however, resolutely rubbish. More, or better, (over and above what’s currently available and utilised) data has no effect on the quality of credit decisioning. Banks in the retail customer segment can already price to risk reliably down to +/-10 FICO score points. It is simply not worth trying to be clever doing anything more granular than that in terms of profitability margin.

I suppose Amazon is better at screwing over labour. I’m not sure, however, that really helps it here.

Yes, Amazon puts its logon on a Chase-infrastructure provided brand slap card. This is low margin business for both parties. Tethering it to a Chase checking account has a certain novelty value, or, at least, it would have if it hadn’t been tried before. It was met by a wave of customer indifference.

I’m just pointing out that, if, Amazon wants to have a Bank, it would probably buy one, not make a new one. Selling a significant percentage of its goods with loans gives it immense money creation ability.

It appears to be reasonable for Amazon to own a Bank, because of the Bank’s ability to create money as loans. I have a property developer acquaintance who obtained a Banking license for exactly that reason, creating money.

“This is low margin business for both parties.” Is Amazon concerned about profit margins or other matters? The equity value of Amazon seems divorced from its ability to generate profits. I believe Amazon is assembling a web-based marketing monopoly in a niche between existing laws where among other things it can avoid taxes and can squeeze the Post Office. Amazon as a bank may be pure hype — but what is Amazon up to?

Тhere’s a law against banks buying businesses in other industries I believe. Someone please clarify that.
But maybe there’s enough legal room in Amazon creating new money for its own subsidiaries to finance expansion to make this make sense?

Can creating new money by a bank be cheaper than raising money in the stock market or via bonds? Someone please provide a competent comment here, I think this is a fascinating angle.

Aha, neat! They could be making a tidy profit on that captive market too, right? So they could be doing A/R factoring for their vendors. That makes a lot of sense.
The checking account talk is just publicity for the sheeple.

“Could Amazon buy a Bank and become a Bank Holding Company, or buy a Bank Holding Company, as a subsidiary, and the parent company would not have to submit to all of its subsidiary licensing and regulation? “

I believe it would be unlikely: Generally, a corporation that controls a bank, or bank holding company becomes subject to the requirements of the Bank Holding Company (BHC) Act. (12 USC 1841(a)(2).

Control is defined as: directly or indirectly owning 25% or more of any class of voting securities of the banking organization, or having any control over the election of a majority of the directors or trustees of the banking organization. (if you don’t have that level of control, why bother?)

Minority equity investments in banks are designed to not trigger these definitions, but there’s also a third definition: The Federal Reserve, after a review, determines that you’re a Bank Holding Company.

Unless you’re actually operating a bank, you don’t want to be classified as a BHC. The financial requirements, recordkeeping, and regulatory scrutiny are onerous. The Act was designed to limit the mixing of banking and commerce, and is pretty effective at keeping commercial interests from also exercising a controlling influence over a banking organization (at least through direct ownership).

The nature of this endeavor and its legal structure is ambiguous. In addition to other direct and indirect government subsidies, Amazon has been a huge beneficiary of the Fed’s liquidity and interest rate policy over the past nine years. A cursory look at Amazon’s summary balance sheet accounts shows the company is levered 4.7x, with most of their short-term liabilities in accounts payable owed to their suppliers. Amazon’s long-term debt has tripled over the past three years. Besides developing new revenue sources in the credit and payments system, I suspect this initiative is an effort to develop another source of inexpensive funding. This is a company that is addicted to revenue growth and the capital environment is changing.

Thanks so much to both Yves and Clive for having tackled this one. When I read about the “Amazon Bank” last week I was hoping some kind soul(s) here at NC would perform due diligence and take up the matter.
I guess since Jeff Bezos owns the world now we should all be grateful he lets us breathe ‘his’ air.
I, for one, refuse to patronize his establishments in any way, shape or form.
My mom always told me that my pocketbook was the only real tool with which one could ‘fight back.’

Thanks. We considered it our civic duty. And Yves’ call the other day to tell people in our circle why we won’t use Amazon and would encourage others to follow our leads is germane. Don’t know if it’s the same for US readers, but here in the U.K. culturally we’re fairly attuned to what our social circle is doing by way of groupthink and if we think there’s a trend brewing we want to not be the ones who are last to know about it (a legacy of a long history of class identification and class neurosis, if I had to speculate).

Since Dr. Evil Jeff’s longest-range goal is to exterminate every other selling platform in the world except for Amazon, if enough UKers can buy enough stuff often enough from NOmazon to keep an alternative system of No Bezos platforms alive; that defeats Bezos’s ultimate goal right there.

But there, just as here, NOmazon shoppers will have to be ready to pay higher prices and keep paying them as the price of keeping NOmazon platforms alive to keep their own vendors and suppliers alive. Are the NOmazon shoppers ready to do this?

Its not as dramatic as going to a protest or a demonstration. But what people do beTWEEN protests and demonstrations will strongly affect what survives and what dies within the body political-economic in the years to come. Politically motivated shopping could be called “shoptivism”. The eye-diddy-ological left will deride them as “shopping for a better world”. They should perhaps turn around and take pride in that derision. ” Yes. I am shopping for a better world. I am a happy shoptivist.”

Emerging markets with limited maturity in their financial services sector are more willing to adopt something new because the something new is obviously better than the nothing that they had. But the US alone dwarfs emerging markets as an entirety in terms of both transaction volumes and transaction amount totals.